Real Estate Finance and Investment 2013; Strategies and Trends Driving Real Estate Investment

Jim Gray, was pleased to attend the Urban Land Institute , ULI, Conference, Real Estate Finance and Investment  2013; Strategies and Trends Driving Real Estate Investment.   The conference was at the Mission Bay Conference Center in San Francisco.

·      ULI Real Estate Consensus Forecast, Conference Agenda

•    New Directions/New Strategies in Real Estate Investing
•   Real Estate Debt Capital: A Shifting Landscape
•    Financing Development in 2013: What, Where, and How
•   Institutional Investor Perspective on Real Estate Investing
•   Mezzanine Capital and Recapitalization Strategies
•  Financing Smaller Real Estate Deals
•  Repositioning Assets and Value-Add Investing
•   Private Equity Investment in the West
•  Investing in Single Family Residential Today
•  Tech/Media/Energy Tenant Trends and Real Estate Investments
•  Public Private Mixed Use Finance and Investment
• Managing Real Estate Investment Risk

In the Conference Materials they indicated that there were “four reasons that someone needed to attend”. They were:

1. Find out what’s next for the market
2.  Make new connections and close deals
3.  Get practical examples of financing structures that work
4.   Build strategies for finding new partners

Consensus Forecast

To me the conference was energetic, insightful and provided a lot of value. Here are a few take-aways from the ULI Finance and Investment Conference.

The conference itself was very well attended nearly 200 folks were present.  The venue was the UCSF Conference Center in the Mission Bay Campus of San Francisco.  First take home impression after participating  in this June 4^th and 5^th event ; “there is optimism" almost “a modest bullishness” that a recovery is underway and the real estate cycle still exists.” I hadn’t felt that optimistic of a vibe in 6 to 7 years.  Right now “that recovery is only strong in gateway and tier 1 cities” and the jury is still out on how much it will spread to secondary and tertiary markets.  Importantly the fundamentals of real estate were driven home; location, physicality and condition of property, proper and changing amenities, strong professional teams, clear strategies related to real estate assets. It is also very important to Know  when to sell and when to buy.  Investing in communities with strong economic fundamentals and real job growth will increase the probability of success. 

The conference was particularly bullish, I suspect in great part because the venue and participants were heavily weighted to participants from San Francisco and Silicon Valley.  But much discussion was given to investing in secondary and tertiary markets.

The first presentation was the review of the Urban Land Institutes and Ernst and Young’s Real Estate Consensus Forecast.  That report is a 3-year forecast of  27 Economic and Real Estate Indicators made by 38 different economic forecasters and real estate analysts. Here is a link to that forecast.: http://www.uli.org/wp-content/uploads/ULI-Documents/ULI-EY-Real-Estate-Consensus-Forecast-April-2013.pdf

In a nutshell what I got from the presentation ULI/E&Y Real Estate Consensus Forecast for April 2013; There will be continued improvement over the next three years for the U.S. economy, considerable strength in the real estate capital markets, continued improvement of commercial real estate fundamentals, and significant growth and improvements in the housing sector.

This forecast  is considerably more optimistic regarding commercial property transaction volume, commercial mortgage-backed securities issuance, and the single-family housing sector. Overall Cap Rates down in 2013 to 5.8%.  Transaction volume up. Rents in most product types will begin increasing , lending will be back in the  Collateralized Mortgage Back Security Market- CMBS or CMBS 2.0, funding up to $70 Billion this year and it is expected to increase in 2015 to $100 Billion.  ( That is compared to a high of  as much as  $215 Billion prior to the downturn.) 

The presentation of the Consensus report was made by Dean Schwanke, Senior Vice President of the Urban Land Institute. I would encourage you to review the link to the Consensus Forecast Slides,  they give a good breakdown for the major commercial and investment property types.  After his review of the findings a panel discussion including representatives of  Ernst and Young, Cole Real Estate Investments and Deutsche Asset and Wealth Management ensued. 

Rick Singular, with Ernst and Young, one of the panelists compared the current situation to the “old Clint Eastwood Movie” the Good, The Bad, and the Ugly.

"The Good" because  the real estate market and the economy is recovering in the United States. "The Bad" is indicative of the fact that Europe and Asia are in trouble in the global economy.  The Ugly is the long-term situation that we face related to the amount of government or sovereign debt as a percentage  of GDP around the world, including the USA, Japan, China, and Europe. Singular believes that servicing that debt is unsustainable . 

He went on to say that he thought that global growth is slowing in – Brazil, India, Asia, Europe and China and as a result additional global capital is finding its way to the “perceived safety of the United States”. He hopes that Congress and the Federal Reserve don't do anything drastic to raise fears. If they don’t we will have improved and slow growth and he believes we will see a continuation of  “stimulus for some time to come”.

Andrew Nelson – VP with Deutsche, reported that there are “ more positives than negatives".  Many people look at the downside of everything.  Increasingly there is good news in energy production…the consumer is in better shape—starting to spend again. Jobs are still anemic but the trend is improving and growing slowly. All in all he felt it was a pretty good environment for real estate investment. The Debt side is very good and accretive.  Things can’t be at the bottom forever. The cost of capital is good. States are in better shape. Local governments banding together for infrastructure through  joint powers and learning how to work with the private sector for additional infrastructure investment.  He sees a 4.5% 10-year Bond Rate in 2017. If that occurs then the 10 year Treasuries will be growing at approximately 50 basis points per year for next 5 years.

He doesn’t believe that the US will be in a 200,000 jobs per month growth environment  and 2% Treasury for much longer.  His projection is for a 2.3% 10-year by the end of year.  He believes that the Fed is going to be accommodating and the Fed  is going to be “gradual.” Change is in line with the improving economy. Impact on CAP rates will be gradual.  Rent growth is going to improve.  Cap rates are not likely to shoot –up but they will rise with interest rates.

Furthermore the panel indicated that the debt issuance- commercial mortgage market is improving.  That CMBS 2.0 is growing.  That fact is going to help in the secondary and tertiary market leading to “broader real estate recovery” . They went on to say that there are “very good returns” in Real Estate when compared to the bond and other investment markets.  Already in 2013 there has been the issuance of $37 Billion in CMBS . Debt Originations are up. More discipline in underwriting.  Not big jumps down the risk curve. 

The panelists thought that we are “returning to more normalized long term total returns” in the 8% to 9% levels. That there will probably be a “lot less volatility” and that most investors would be obtaining  80% of their “returns in rental income and NOI and only 20% from Gains.

Here are a few comments about the various sectors of the Real Estate Market .

NOI growth is about to become the “sweet spot” in Industrial and Office.  There is demand for large and modern industrial and  warehouse space driven by trade, expanded ports and shipping improvements.

An important question that the panel offered is; “Where is employment growth going to come from?”  We need to create almost 125,000 jobs to keep up with normal population growth.  Demographics plays the biggest role in job growth.  The housing sector should create construction jobs and be fueled by  “more household formations” moving out of mom and dad’s , getting married, starting families and etc and that will be driven by demographics.     Also manufacturing  is recovering and improving particularly in  technology and in energy. Also business investments are growing slowly again. 

But we have become a more “unequal society” in the last 3 decades.  Higher skilled workers have very low unemployment but the unskilled worker will remain at risk and what jobs will there be for them?   Population is growing and that will help fuel demand, growth, and ultimately additional jobs. 

Apartment Sector has been red hot!  Multi-family will continue to be very strong. There are  80 million “echo boomers” aged 16 to 34 and many of them, the great majority of them, are renters.  Maybe many will remain renters because of mobility and because home ownership has perils associated with it. Many are unable to raise  a down payment.  “We will become more of a rental society” and that will be perceived “as fine and as a choice”.  The future will be one with very low vacancy.  Rents will increase. But lots of new units are being constructed and the rate of rent growth will moderate. Tens of  thousands of new units will start hitting the markets in 2015 to 2016

There is a shift in the apartment market.  Smaller with better amenities.  Good common areas.  Fully wired with lots of technological amenities. Apartment Rent growth in Bay Area and Silicon Valley is related to “tech and medical” job growth.  Rents have really gone up where jobs are growing and supply is constrained. 

Single Family Housing has turned on a dime. The majority of the Single Family homes being  bought were “tenant occupied” or bought by investors who will seek tenants.  The analysts were surprised that most reports are that “the investors have done a pretty good job managing… and that they have found relatively stable occupants…” Not particularly competitive with apartments. Occupants of the single-family homes tend to be families with kids, dogs and RV’s.  Not really candidates for apartments.

Also the panel pointed out that “rent growth” is  higher than “income growth” and that it is probably not sustainable. Also when you consider student loan debt service requirements those facts will slow and mitigate apartment rent growth… The apartments most in demand are in “the city” offering a 24-hour lifestyle.  They seek  density and design , and they will attract tenants who want to be where the action is. 

In conclusion the first panel made a positive impression about a recovering commercial real estate environment. It is a good time and an improving time to be in commercial real estate investment.  

More from the conference in future blogs.

If you would like to review or discuss please feel free to contact us. Jim Gray and Nahz Anvary at (916) 375-1500 or jim&nahz@ctbt.com